Private Empire: ExxonMobil and American Power (59 page)

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xxonMobil had amply proved that it could profit in the midst of weak American energy policies; indeed, the corporation’s central role in the American energy economy was in many respects a function of Washington’s inability or unwillingness to challenge assumptions about oil that had prevailed during most of the previous century. Confused and inconsistent American energy policy, then, was hardly a threat to the corporation; it was built into ExxonMobil’s business model. The question that mattered more in Irving around the time of Bush’s speech was whether the rapid, disruptive emergence of alternative energy technologies might upend the oil and gas industry. Could the pennies Bush tossed in the wishing fountain pay off unexpectedly?

Technological revolutions regularly overthrew incumbent industries and their corporate leaders; Moore’s Law, which described how computing power was becoming ever greater and cheaper as the years passed, suggested that technology-driven upheavals in the American economy would likely occur more frequently than ever before. Since 2000, the Internet and related digital technology had radically disrupted the assumptions of retailers, publishers, and broadcasters in a very short time period. Was it conceivable that ExxonMobil might face a similar disruption from the sudden rise of a transformational alternative energy source?

Lee Raymond’s view had been that it would be impossible to predict all technological change, but if ExxonMobil maintained a tightly disciplined process of planning and review, its executives might spot new technical trends early, as they started to make market impact. Tillerson proceeded from similar assumptions. Nothing in the oil industry happened overnight: Disciplined planning could catch innovation in its takeoff phases.

The Management Committee reviewed the possibilities for technology surprise each year as part of its Corporate Strategic Planning exercise. At Irving, William Colton, a chemical engineer, finance specialist, and ExxonMobil lifer, led the reviews; he reported directly to Rex Tillerson. Colton was a sharp analyst with a slight smirk; he was not an economist, but his tours as an apprentice executive and later as treasurer of the company’s upstream division had educated him about the corporation’s financial model and its strategic challenges. Rosemarie Forsythe, the former National Security Council analyst who ran ExxonMobil’s political risk department, participated in the reviews, along with a team of economists and business analysts. The corporation’s 2030 “Outlook for Energy,” which confidently predicted continuity in global oil and gas markets and foresaw only limited penetration by solar and wind technologies, reflected the main thrusts of the group’s long-range forecasting.

What if they were wrong? Scores of competent economists predicted rising housing prices for decades ahead. Their inability to perceive a speculative bubble and to imagine a radical departure from historical trend lines would soon destroy some large banks and humble many others. ExxonMobil’s own history of strategic prognostication could hardly provide its executives full confidence. Its planners had failed in the past to accurately forecast fundamental questions about the future of oil and gas prices. They had failed to predict some big changes in the American transportation economy, such as the popularity of S.U.V.s. Their basic analysis of the global energy mix had proven sound, although where it was a little off, it tended to suffer from intellectual conservatism—a failure to credit the possibility of more rapid change than conventional wisdom would typically credit. As part of their annual technological review, Tillerson and Colton decided to take a deeper look at some of the emerging new energy technologies just to be sure that ExxonMobil was not missing something that could be suddenly disruptive to the corporation’s basic businesses.

They commissioned fresh assessments from ExxonMobil’s own scientists, but also pushed the scientists to develop analysis from outside the corporation. The review produced proprietary, inch-thick white papers from outside scientists and technologists, papers designed to double-check or challenge in-house findings and assumptions.

By 2007, Irving’s planners felt they had a solid grip on the state of solar and wind power technologies. While the corporation forecasted rapid growth in those industries, aided by government subsidies, ExxonMobil did not regard solar or wind as a meaningful threat to its business. For one thing, solar and wind systems generated electric power and had little direct impact on transportation fuels, the heart of the oil industry. Natural gas, ExxonMobil’s principal contribution to power generation, promised to be price competitive with solar and wind for many years to come, and because of the relatively low carbon content in gas, that fuel would likely benefit from more intensive climate regulation, if such regulation emerged.

ExxonMobil now considered such regulation more likely than not: Although the corporation’s Washington office still lobbied vigorously against a price on carbon, Strategic Planning in Irving now assumed, for purposes of its annual forecasting, that carbon taxation or limitations would be enacted in the United States in the future. There was inevitable tension between Tillerson’s leadership group and Dan Nelson’s Washington shop—in effect, the corporation’s forecasters were betting against Nelson’s ability to ward off climate bills. There was a risk that Irving’s analysis would become self-fulfilling prophecy, if it led ExxonMobil to change its lobbying position on climate policy to appease rising Democrats. Nelson argued, in the manner of the former marine that he was, that capitulation would be premature and that ExxonMobil should stick to its guns.
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Only technology—not Washington policymakers—was likely to ambush ExxonMobil. The only area where a breakthrough might be deeply consequential would be in transportation—some leap that suddenly changed how most cars and trucks were powered. As of 2007, the most oft-discussed scenarios for such a revolution in transportation fueling involved the possible emergence of hydrogen fuel cells, biofuels derived from plants, and the growth of battery-powered vehicles. The team Colton helped to coordinate examined all of these possibilities in depth.

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ydrogen is the most abundant element in the universe, but it does not typically present itself in isolation; it promiscuously gloms onto other elements to form compounds such as water. Once separated, however, hydrogen can be burned to create energy while releasing relatively few harmful emissions. Hydrogen optimists have fantasized about its potential as an abundant, environmentally sound, affordable car and truck fuel since the 1960s, when the technology emerged from research to support the U.S. space program. After September 11, hydrogen advocates reached President Bush and prompted his decision to fund new research at the Department of Energy. However, a sober 2004 National Academy of Sciences study soon listed the “major hurdles” that stood in the way of a hydrogen miracle, noting, “The path will not be simple or straightforward.”
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ExxonMobil’s corporate planning analysts had monitored hydrogen research for many years; they were well familiar with the element’s industrial uses and difficulties, and they felt confident that the United States was not on the verge of any sudden, transformational turn into a hydrogen-based-energy economy. Sally Benson, the scientist who ran the ExxonMobil-funded research partnership at Stanford University, believed that “three or four near-miracles” were required before hydrogen could threaten gasoline, although she pledged her program to pursue them.
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After Bush launched his FreedomCAR initiative, ExxonMobil appointed one of its transportation fuels specialists, Buford Lewis, to travel and speak worldwide about hydrogen’s potential, but also, pointedly, about its limitations—Lewis traveled with carefully composed PowerPoint slides, derived from Irving’s public policy issues binder. The slides acknowledged hydrogen’s theoretical potential as a car and truck power source but laid out in detail the practical challenges. These involved the expense and risk of building a national hydrogen infrastructure, the problem that much dirty energy was often required to separate hydrogen from other compounds in order to burn it cleanly, and the difficulties of engineering viable fuel cells that could fit and operate inside vehicles economically.
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Lewis was eventually recruited to serve as ExxonMobil’s principal lobbyist in the United States Senate. He worked the Senate aisles alongside Dan Nelson by the time of Bush’s “addicted to oil” speech.

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ush also pledged to redouble the federal government’s investments in ethanol, a form of alcohol. Might that be the “black swan” fuel that upended ExxonMobil’s oil and gasoline business? The chemical processes by which ethanol could be extracted from sugar and grain had been known to mankind for centuries—mainly because they produced an alcohol that made people drunk and happy, or at least temporarily distracted them from their miseries. Ethanol had also been burned as a fuel in the industrializing West since the early nineteenth century, but it was not as efficient as oil-derived fuels such as kerosene. It first emerged as a subject of possible federal regulation and mandates for use in the United States after the oil shocks of the 1970s. In that era’s search for freedom from Middle Eastern oil, ethanol distilled from corn surfaced as a possible solution. The fuel’s advocates—primarily in the agricultural Midwest—also promoted ethanol blends as a way to reduce air-polluting carbon monoxide emissions from burned gasoline. Initially, gasoline blenders added MTBE to their fuels to reduce carbon monoxide pollution. When concerns about MTBE’s impact on human health surfaced, ethanol reemerged as a potentially safer alternative.

Ethanol refiners and corn growers around Chicago and other midwestern population centers organized themselves into a Washington advocacy group, the Renewable Fuels Association; hired lobbyists; and pushed Congress to adopt a mandatory national production level of ethanol—a forced march to freedom from oil. Ethanol mandates would also raise corn prices and enrich farmers. Like other farm subsidies, the push for ethanol in Washington was enabled by the constitutional makeup of the United States Senate, where sparsely inhabited farm states enjoyed disproportionate clout because each state elects two senators no matter its population base.

Many late-model American cars could burn fuels with up to 85 percent ethanol, mixed with gasoline, without being modified. The potential benefits of ethanol included the ability to grow corn for transportation fuel within the United States, substituting this for foreign oil, and the fact that ethanol blends produce fewer global warming emissions than pure gasoline. The drawbacks were substantial, however—primarily the lack of enough arable land, even in the vast United States, to produce the tons and tons of corn needed to manufacture ethanol in the volumes required to support American driving habits. Brazil, straddling the equator, produced ethanol efficiently from its abundant sugar crop, but the United States could not match that feat with corn. By directing so much corn production into ethanol manufacturing, the United States risked raising food prices at home and abroad. Nonetheless, in 2004, lobbied by farm-state politicians such as South Dakota’s Tom Daschle, then the majority leader of the Senate, Congress passed a fifty-one-cent-per-gallon subsidy for ethanol. The next year, Congress enacted an Energy Policy Act that mandated an annual minimum use of ethanol, rising from 4 billion gallons in 2006 to 7.5 billion gallons in 2012. Lee Raymond refused to support the bill, given its webs of complexity and subsidy; he found it a “totally politically driven process.” It requires about 1.5 gallons of ethanol to power a car as far as 1 gallon of gasoline would. Between this gap and the federal price subsidy, the true cost of ethanol ranged as high as six dollars per gallon in noncorn states by 2006, according to the calculations of Harvard University environmental studies professor Michael B. McElroy.
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Two years later, Congress extended the ethanol mandate even more dramatically, setting a target of 36 billion gallons of annual biofuel use by 2022, or about 20 percent of total transportation fuel. That might not destroy ExxonMobil’s gasoline-based business model, but it was a large number. Was it realistic? That was the fundamental question that the ExxonMobil team conducting internal technology reviews sought to answer.

Most of this hoped-for Congress-mandated biofuel would have to come from as-yet-unproven technological innovations that might allow “cellulosic” ethanol to be derived efficiently from dense plants—specially engineered stalks, wood chips, or switchgrass. The emergence of such a fuel might address the problem with existing ethanol technologies: that all the corn on all the land could not make enough ethanol to power 20 percent of American cars and trucks.

Fundamentally, ExxonMobil’s executives doubted the transformational potential of ethanol; as with wind and solar, executives knew the technologies and chemistry well enough, from past work with them, to have earned their skepticism. Tillerson derisively referred to ethanol in public as “moonshine.”
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ExxonMobil’s downstream gasoline refining and retail division had produced and sold ethanol for years, and its technicians scoffed at the idea that it would be possible to produce anything like 36 billion gallons commercially by 2022. The corporation’s strategic research partners at Stanford University noted, too, that all of the energy in all of the biomass on Earth is only six times greater than the total energy used worldwide; it would be hard, therefore, for plant-derived fuels to produce a dramatic change in energy production patterns, no matter how great the technological leaps forward. Still, plants did produce liquid fuels, which were convenient for transportation use, and humankind had already learned how to farm, so there was at least the potential for a transformational surprise.